Necessity to have a good credit score in our financial lives
At any time of your life, if you want to take a loan to buy a home or a car, or want to buy insurance for yourself or your family, the lender or the insurer will first consider your credibility on the basis of your credit score. If you have a good credit score, you can get loans easily, otherwise you have to pay a higher interest rate.
What is a credit score?
A credit score is a three digit number which tells you how creditworthy you are in repaying a loan, after you get it. A credit score is calculated on the basis of FICO (Fair Isaac Corporation) model.
There are three main credit bureaus, Equifax, TransUnion and Experian. These credit bureaus generate different credit scores, according to their mode of calculation. So, to avoid this discrepancy, the Vantage score model has been introduced. All the three bureaus calculate this score in the same way. The Vantage score has a range from 501 to 990.
What are the factors that affect a credit score?
The credit score gets affected by some elements in your credit report, like,
Your total debt: It includes your types of accounts with balances and how much you owe in each account. It also includes number of zero balance accounts and how much you have used your revolving credit lines, which gives the information whether or not you are over-extended.
Length of credit history: It gives information on the total length of time since you have opened the accounts and if you have a longer period of good history, your credit score becomes better.
Number, age and type of credit accounts: It includes information on the total number of account and their types, like, mortgage account, revolving account, installment account, etc. If you have a mixture of accounts, you will have a better credit score.
Payment history: If your credit history is longer, it means you are to possibly have a greater credit score. It includes the number of accounts paid and number of delinquent accounts. In case of delinquent accounts, it also gives detailed information on the total number of past due items, and the length of time you have been past due.
However, credit score does not get affected by your race, color, religion, nationality, marital status, age, place where you live, your salary or nature of job.
Why is it necessary to have a good credit score?
It is very important to have a good credit score because, it will help you to:
Get a loan: If you have a good credit score, you will be easily eligible to get a loan, at a lower interest rate. If your credit score is not good you have to pay a very high interest rate to take the loan.
Get employment opportunities: The employers will check your credit history, and if they find your credit score is good, they will accept you, as a good credit score conveys that you are a responsible person.
Get lower insurance premiums: If you want to buy insurance for yourself, your home or car, the credit score plays a vital role in determining your premium amount. If you have a good credit score, you will get lower premiums.
A good credit score and a good credit report make the most important parts of your financial life, so, it is necessary for you to improve and maintain your credit score.